Buyers burned by BurnLounge

If you or your clients work in the multi-level marketing (MLM) arena, a decision by a federal judge in the FTC's lawsuit against BurnLounge, Inc., merits your attention. The defendants — the company, the CEO, and top salesmen — used claims of hefty profits to sell opportunities to run online digital music stores. According to the FTC, the outfit masqueraded as a legitimate MLM program, but really was an illegal pyramid scheme. After a nine-day trial, the court ordered a total of $17 million in refunds for consumers who were burned by the scam.

BurnLounge promoted itself online, through phone calls, and via in-person meetings with claims of big money to be made. According to the FTC, at a recruiting presentation in New York, the company's CEO said: "[I]f you build a community that sells a few movies and sells a few games and sells a few downloads, you will have a license to print money. Don't take my word for it, go ask Blockbuster what they made on $3.95 off 1,000 stores. J.T. made $50,000 two weeks ago. He's going to make probably $700,000 this year, and he's a good old boy from Texas that can't read."

Ultimately 56,000 were lured into the scheme.

BurnLounge claimed to be a cutting edge way to sell digital music through multi-level marketing, but music sales accounted for only a small percentage of the money. The vast majority of it came from payments to join the scheme disguised as so-called "product packages." In fact, the program primarily paid people for recruiting new participants, not on the retail sale of music. According to the Court, the BurnLounge enterprise resulted in a big return for a small percentage of the participants, which was funded by substantial losses for the vast majority of the recruited participants, who didn't recoup their investment to join.

The Amended Final Judgment and Order bans the defendants from future pyramid activities. Notably, in constructing the ban, the Court adopted the FTC's proposed definition of "prohibited marketing scheme," which was a hotly litigated issue in the case. The Order also imposes fencing-in. The Court enjoined the defendants from misrepresentations about not just multi-level marketing, but franchises and business opportunities as well. FTC attorneys had argued that the remedy was warranted because the defendants' practice of misrepresenting potential income could be readily transferred to those endeavors. The Court also ordered $16.2 million in monetary relief, making the company and its CEO jointly and severally liable for the total. The remaining individual defendants were ordered to pay specified amounts of disgorgement.

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